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VerticalNet CEO shows staying power

It's been a wild ride for Mark Hagan, the founder of VerticalNet. Now he's back on top as CEO, amid a down market and a new software strategy.

It's been a wild ride for VerticalNet chief executive Mike Hagan.

After leaving Merrill Lynch six years ago, Hagan co-founded VerticalNet as a company focused on Web content. In short order, VerticalNet expanded far beyond its original focus. The company pushed into the growing business-to-business market to maintain a wide range of exchanges serving automotive, high-tech, health care and food packing industries, among other sectors. The strategy hit a home run with Wall Street, and pushed the company's stock into triple digits.

But what goes up, some say, generally finds its way back down. The company has recently been caught in the same downdraft that has slammed so many other former high-flyers in the business-to-business market. The company's stock has fallen from its 52-week high of $148.37 last spring to just more than $3 today.

Hagan also has suffered through executive turmoil. He found himself back at the top of the company following the resignation of CEO Joseph Galli--only five months after Galli had taken the helm.

The months since have been rough. The company cut 150 workers, or around 8 percent of its staff. VerticalNet posted a fourth-quarter loss and warned it would lose between $28.5 million and $31.5 million in the first quarter. Analysts have also been skeptical of the company's new focus on software sales--a business decision that puts the company squarely in the competitive sights of companies such as Ariba and Commerce One.

In a recent interview Hagan discussed his staying power and future plans for VerticalNet.

Have you settled into the chief executive spot yet?
It's actually a fairly easy transition. I started the company about six years ago. The first few years I ran the company, then recruited (current chairman) Mark Walsh. (Former CEO) Joe (Galli) came and went almost overnight. It was an easy transition for the board. When Joe decided to leave, the board considered doing a search but decided, 'Who better to run the company than the guy who co-founded it?' I've been involved in every strategic decision the company ever made, so it's not that difficult to make that transition. I'm much more externally focused then I have been over the years.

How did all that upheaval, changing CEOs three times in six months, affect the company?
We didn't change--Joe came and went. The baton was handed off from Mark to Joe, and Joe to me. The executives didn't know Joe long enough to know whether his strategy and key decisions were something of which they were supportive. It was five months.

I have nothing but good things to say about Joe, but it (wasn't like) he was here for two to three years. I was involved in hiring all these people and the sale of NECX to Converge, and very much the guy who conceived our B2B strategy when we acquired (Isadra and Tradeum).

Did the transition slow you down? It must have taken Joe a few months to get up to speed--and then he's gone.
In hindsight, we could have been in a different place today. It's too quick to say there was an impact, positive or negative. I was, in effect, running the company as Joe familiarized himself with Wall Street. And the common thread with Mark and myself has provided continuity with direction. Most of the employees are staying because they believe in us and the (company's) vision. And it's about time to look internally, and avoid looking at the stock market.

You have been portrayed as a good CEO candidate because you know the business well. Why didn't the board pick you in the first place instead of Galli?
Most of the employees are staying... I guess the decision was that we were not looking for a CEO when we brought Joe on. Mark was doing a fine job. The way I describe it is like this: it was like a good athlete. When a team owner drafts, if a good athlete comes on the board, you take him. We met Joe as he was leaving Amazon.com, and with his knowledge of the (business-to-business) supply chain. He thought a company like VerticalNet was going to provide him the opportunity to draw on experience from Amazon and Black & Decker.

He found that companies like Newell Rubbermaid--with 80,000 people--and an opportunity to run his own company and manage a multibrand, enormous $7 billion to $8 billion company was more attractive then running a high-growth, high-tech company like VerticalNet.

VerticalNet hasn't just changed leaders. It has changed focus. Why the switch to software sales?
We went public in February 1999. We had grown from one to--at that time--45 vertical marketplaces. We understood that you couldn't go from 45 to 400 because it was getting more competitive, and we had a two- to three-year runway. We didn't go superdeep like (competitor) Ventro into one industry, because that's too expensive. We thought that, with the software we're building, we could leverage, productize, and take smaller stakes in new markets, or sell software and let other people run commerce and community marketplaces.

Because we're so decidedly supplier-centric, we tried to solve what we thought was the toughest business-to-business problem: to solve how to manage supplier data and product content. We identified a company that was 12 to 18 months ahead, called Isadra...and bought them just after we went public. That was the beginning and the roots of the commercial business-to-business software division.

We acquired NECX in late 1999; it was a high tech exchange that was very much offline when we acquired it. We tried to create the Nasdaq for the high tech industry...we were attempting to "Webify" the entire business through exchange technology and reverse auctions. We thought we had to own it, and found a company called Tradeum in late 1999, and completed that purchase in early 2000. That brought us a lot more of the product footprint we've been looking for.

Last year we have been building this out. We started getting traction in the second quarter of last year. We surprised people with the amount of momentum we had. In the fourth quarter, we had north of $6 million in software revenue.

Really, the division is just past the early development stage. We have a couple hundred R&D engineers. It's a talented and growing business. It allows us to leverage software we have and intellectual capital (we have) so we can go in and help our partners.
On the software side, we had a huge endorsement when Converge (the company which acquired the NECX business) looked at all the business-to-business software and said, 'No one else has the knowledge around high tech.' From day one, we didn't try to create indirect materials software. From day one, we focused on direct materials; all of our applications were built with that in mind. It accelerated their strategy 12 to 18 months and our software strategy 12 to 18 months.

Analysts have expressed concerns that your software sales won't pick up fast enough. While you've got a big customer win with Converge, how are you going to push that division ahead? And how will you compete against i2 Technologies, Ariba and Commerce One?
No. 1, it's a big market. The strategy sourcing space is very nascent. You don't see any direct materials procurement management using Ariba and Commerce One. i2 is in a good place to capture a lot of strategic sourcing...direct materials and workflow around that are very different from operations. We have a 12- to 18-month lead because that's what we've been doing for the last two years. It's very much a top priority to position (VerticalNet) in the hearts and minds of CIOs as a world-class software company. Converge, they looked at everything i2 and Commerce One (were doing) and truly thought the best in breed was VerticalNet.

Your markets division has been hit hard by an advertising slump. What will it take for that sector to recover?
Essentially we will be a consolidator in the space. We have a much different cost structure (then other marketplace firms), everything in my back office, I leverage across all different divisions. In the back end, it's all one platform. As we told Wall Street, we expect on a combined basis to be profitable in the fourth quarter of this year. As we get closer to profitability... As we get closer to profitability, we'll let the market know that being a marketplace owner is not a bad thing. There's a lot of bad stigma attached today because of marketplaces that have imploded. But we're going to be the last guy standing.

Some analysts said the problems with the e-commerce may not be caused by the economy, but by poor performing storefronts--and at least one analyst predicted that current subscribers would not renew. How do you feel about that?
We continue to see renewal rates in excess of 50 percent. We have been conservative in some of our estimates, and the value proposition is strong and getting stronger. There's less competition than where we were nine months ago, and VerticalNet is in a good position to bring these guys in.

What will it take to get analysts back on board?
There's not one company out there that hasn't felt the effect of analysts' wrath over the last of couple months. It's been a bloodbath. You just kind of hunker down in your bunker and avoid the shrapnel. That's what our team is good at.

You announced layoffs in January. Do you have more cost-cutting to do?
No. We don't see cost cutting on the horizon, especially in area of human capital. The company is going to go at a much more prudent rate. The days of winning share at all costs are over. It's a whole different Internet environment than 12 months ago or 24 months ago. We have more than enough cash to get to profitability and a couple of great partnerships. Converge provides $108 million over three years and Microsoft provides $220 million over three years.

After I took over I wanted to begin to build credibility with employees, shareholders and Wall Street. I only want to make promises I know I can deliver.

What's chairman Mark Walsh's role these days? Is he an active or a silent chairman? How involved is he with day-to-day operations?
He's very good on the public speaking front. His value is in going out there and evangelizing the VerticalNet story. Operationally, he's not involved in day-to-day stuff--that's my team. Mark's out there talking to customers. He sits on every industry panel known to mankind. He's active, and a five-day a week or seven-day a week kind of guy. His biggest benefit to VerticalNet is to go out on the road and talk to customers.

In its latest quarter VerticalNet was 13.8 percent owned by institutions, compared with 25 percent in the previous quarter. Why do you think that is? Do you think that indicates a loss of confidence on the part of the institutions?
I think it's not unique to us. I just think a lot of institutions are staying away from Internet stocks. As cachet as it was a year ago to be associated with the Internet, today it's got such a negative stigma associated with it. I can't really give an answer to why institutional ownership dropped.

It's my goal to get momentum and institutional ownership up, doing fundamental things such as under promise and over deliver.